Micro Finance in India (MFI) is disbursed through either the Self Help Group (SHG) Model or the Joint Liability Group (JLG) Model , both drawn from the Grameen Bank of Bangladesh. MFI have played a critical role in financial inclusion, yet it has faced several challenges over the years, key ones being over leveraging and defaults , leading to NPAs. The gross NPAs for the sector surged to 16% at the end of FY 25, up from 8.8% the year before and in absolute terms the NPAs totalled 61,000 crore from 38,000 crore a year ago. We analyse the problems, model wise; SHG Model: The model was based on member savings at the base . Theoretically, this model can never fail, and it never did. If the group cohesiveness was intact, then loan decisions were smooth and there were practically no defaults, but few days delay. But the moment the leverage of the group went up and external finance started flowing in , the group members took the liberty of defaulting the external fund source- as a group they defaulted and the external fund source, Bank or NBFC could do nothing except quarantining them. And with each SHG being a Micro Unit, the default had no domino effect. JLG Model: This model appears to have crumbled totally. The model operated on a very low or zero tolerance for default and put pressure on the groups to bail each other out in the case of an individual default. The model was coercive in nature with the group meeting getting held up if a single member defaulted. As a result , the single member did not default, or the default was covered by another member. But if it spread to multiple members or multiple instalments, it resulted in a domino default. When a crisis hit again the reasons were -high leverage, high interest rates and coercive recovery practices. Looking at high leverage , it was found that multiple Micro Finance Institutions had lent to the same SHG, which could have been avoided by better coordination with the set up MF Credit Bureaus. High leverage and coercive recovery practice often triggered suicides , which could have been avoidable by lending as per capability of the borrower. That way, CIBIL score is a very useful tool for big ticket loans. The traditional crisis management response is to put forward the Self Regulatory Organisations (SRO)-Sa-Dhan and M-Fin and assure us that fair practices would be followed through them and there would be free flow of information. But there was conflict of interest, since the SROs were ultimately funded and governed by the member organisations that were to be regulated. Hence SROs have to be made autonomous to prevent bad practices such as multiple lending. Another fundamental reform , that would needed in practice is the Grameen II model, through which the lender puts the defaulter on a Debt Restructuring track through a supplementary loan and give added help in ‘guiding the micro business’ and not use the new loan to repay the old loan and extend the default date. Workshops on borrowing and lending within capacity need to be held at village level, similar to workshops on Tobacco , Swachh Bharat and Human Hygiene practices. In the whole sector, there are gaps in Practice more than Policy.
